The Usual Suspects?: Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates
UCSC Economics Dept. WP #371
Posted: 15 Apr 1998
Date Written: June, 1998
The evidence for a productivity-based explanation for real exchange rate behavior of East Asian currencies is examined. Using sectoral output and employment data, relative prices and relative productivity levels are calculated for China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Time series regressions of the real exchange rate on relative prices indicate a role for relative prices for Indonesia, Japan and Korea. When examining real exchange rates and relative productivity ratios, one finds a relationship for Japan, Malaysia, the Philippines. Only when augmenting the regressions with real oil prices are significant relationships obtained for Indonesia and Korea. Relative per capita income, a proxy for preferences towards services, does not appear to be an important determinant in this sample. Panel regression results are slightly more supportive of a relative price view of exchange rates. However, the panel regressions incorporating productivity variables, as well as other demand side factors, provide less encouraging results, except for a subset of countries ( Indonesia, Japan, Korea, Malaysia and the Philippines). Surprisingly, neither government spending nor the terms of trade appear to be a determinant of regional real exchange rates.
JEL Classification: F31, F41
Suggested Citation: Suggested Citation